Even if Twitter Is Profitable, Is It Worth $1 Billion?

So much for all those people who consider Twitter worthless. It may actually be set to make a profit this year. How so? Bloomberg BusinessWeek reports Twitter has signed $25 million worth of deals to make its content available to search engines. It also reports that Twitter has figured out how to lower its telecommunications costs. Whether those deals really make Twitter profitable is open to debate. But even if it were to be in the black this year, do the deals make Twitter worth $1 billion?%%DynaPub-Enhancement class="enhancement contentType-HTML Content fragmentId-1 payloadId-61603 alignment-right size-small"%%Let's look first at why Bloomberg BusinessWeek reports Twitter is profitable. As I've posted, I thought that one way Twitter could turn those 140-character messages into money was by following Google's (GOOG) search advertising model. That's where an advertiser bids to put its message next to search results. Twitter has decided to go that route through $25 million worth of such search deals -- making Twitter messages searchable on Google ($15 million) and Microsoft's (MSFT) Bing ($10 million).

But wait, there's more to Twitter's 2009 profit. Bloomberg BusinessWeek also reports that Twitter has lowered its costs. Due to its big volume, it has been able to negotiate a lower rate on its payments to telecom companies for distributing billions of text messages over wireless networks. All told, Twitter employs about 105 people and pays an estimated $20 million to $25 million a year to keep itself operating.

So is Twitter worth $1 billion? It has raised $155 million in capital so far, and its latest valuation was $1 billion. As I've posted, Facebook is valued at around $10 billion and is anticipated to have $500 million in 2009 revenues. That would give it a value/revenue (V/R) ratio of 20. Applying that same ratio to Twitter's $25 million in revenues means Twitter would be worth $500 million now.

With these $25 million search deals, Twitter is at best only 50% of its way to a $1 billion valuation, using Facebook's V/R ratio as a basis. The challenge for Twitter in 2010 will be to get that other 50%.